What is Whole Life Insurance

What is Whole Life Insurance

Whole Life insurance will pay a death benefit when you die. Once you have bought a Whole Life policy, it is guaranteed to be annually renewable, typically at a level premium. In addition to death benefits, Whole Life policies can offer tax-advantaged estate planning and long term savings benefits.

The “face amount” of Whole Life insurance is the amount of the benefit that will be paid when you die. This death benefit paid by your whole life insurance policy is generally tax free income, but there are specific situations where it may be taxable.

The “cash value” is the accumulation of your premiums after allowances for company expenses and claims. Over time the cash value grows, usually tax-deferred, and you can access that money by borrowing against the policy loan or taking a payment of the cash value. If a policyholder takes a loan against their policy it can be tax free instead of a cash surrender which is taxable.

There are many types of Whole Life insurance, reflecting differing premium payments (single or annual), and whether the cash value of the policy is eligible for dividend payments from the insurer. Since Whole Life policies combine investment, tax minimization, and estate planning capabilities with life insurance benefits, evaluating them requires professional advice tailored to you.

Types of Whole Life policies

  • Indeterminate policies

    Whole life insurance policies that are indeterminate have premiums that vary year to year based on economic conditions.

  • Limited pay policies

    You are only required to pay your premiums for a limited number of years. After this payment period is finished, you still maintain coverage.

  • Single premium policies

    Have a large single payment as a premium.

  • Interest sensitive policies

    Have policy interest rates that depend on the current market which are used to increase your policy’s value instead of dividends.

There are also different options you can add to your whole life policy, like being able to miss premium payments if you become disabled. When choosing an insurer you need to look at the monetary strength of that company because that helps ensure that they will be able to honor your policy.

You can be approved for whole life policies through simplified issue, guaranteed issue, or fully underwritten. Simplified issue policies only require you to answer some medical questions, guaranteed issue plans do not have any requirements, and fully underwritten plans usually have a longer process that requires a medical exam.